In our own quiet way, we’re celebrating 35 years of indexing at Vanguard this year. (Hey, you wouldn’t expect party hats and champagne at Vanguard!)
Indexing is an amazing success story—and not just at Vanguard. From a controversial, much-derided idea back in 1976, index investing has grown to be a widely accepted investment approach today.
If you’ve heard of Pat Venditte—a minor league pitcher in the Yankees organization—you may know he has an extra tool in his arsenal. It’s not another pitch, but another arm.
He’s ambidextrous and changes his pitching arm depending on the batter he’s facing. He still has to deliver on the pitch, but he has a choice—and never has to plan his strategy from a single approach. The ability to change from right to left can be a competitive edge.
How does this relate to investing? Decisions around investing are often posed in all-or-nothing frameworks: all index or all active, or somewhere in between?
In 1976, Vanguard launched its 500 Index Fund, making it the first index mutual fund available to non-institutional investors. The creation of an index fund intended for individual investors was an important salvo in the now long-running battle over which investing approach—active or passive—is superior.
This is a 35-year-old fight (at least) that I certainly don’t think I can settle. But in discussions of the issue over the years, I’ve found that a few points are really critical, and often not appreciated by more casual participants.
Well, at least Dilbert’s creator, cartoonist Scott Adams, thinks that indexing makes more sense for most investors than picking individual stocks.
In characteristic overstatement, he suggested on his blog that someday it could be illegal for individuals to buy individual stocks, given the harm they might do themselves. He argued that the odds of beating the market are so slim that picking individual stocks is a form of gambling.
Not surprisingly, his musings drew critics. In a follow-up posting on the criticisms, “Warren Buffett and You”, Mr. Adams noted that some writers pointed out that Warren Buffett’s track record proves that individuals can succeed in beating the market.
